Shareholders Agreement

A Shareholders Agreement is a legal relationship document between shareholders in a company which sets out the legal relationship between the stakeholders.

A Shareholders Agreement is a legal relationship document between shareholders in a company which sets out the legal relationship between the stakeholders. The principles mostly also equally apply to:

Unitholder agreements – or terms of a unit trust deed;

Partnership agreements including a partnership of discretionary trusts;

Joint venture agreements;

Co-owners agreements;

Development agreements.

A shareholders agreement is a contract between shareholders which overlays the constitution of the company (which itself is a quasi contract between shareholders) where shareholders have agreed on a process of how to deal with a dispute between them so that there are workable solutions when things go sour.

There is no legal requirement to have a shareholders’ agreement in place. However, if you have more than one stakeholder in a business enterprise, not having a shareholders’ agreement or like document regulating the legal relationship of the participants can lead to unnecessary difficulties such as:

  • Disputes between minority interests;
  • Bar to an advantageous sale;
  • Dysfunction between directors and stakeholders;
  • Disputes as to distributions and sharing of profits or dividends;

There are a range of issues to consider when drafting the relationship agreement whether it be a shareholders’, unitholders’, joint venture, development or partnership agreement including:

  • Unexpected Exit – what happens if a shareholder dies or becomes totally and permanently disabled for work. A well-considered relationship agreement may provide buy sell provisions where on the death of a stakeholder, their interests are purchased using the proceeds of a life insurance policy over the deceased shareholder’s life. This avoids a major cash flow problem for the surviving stakeholders and enables the deceased’s family to quickly be paid proper value for the shares. It also protects against unwanted spouses becoming involved in the decision-making of the business
  • Shareholder Funding & Contributions – You can set out exactly how the shareholders fund the acquisition of their respective shares. People can acquire an interest in the enterprise in various ways, so it’s important to outline these clearly.
  • Director/Management Appointments – You can specify, in detail, the stakeholders’ rights to appointing Directors (if any).
  • Decision Making, Management, Obligations & Information – you can set what the voting rights are for management decisions and the can specify, in detail, how specific types of management decisions are to be made specifying what decisions require a majority (50%), special (75%) or unanimous (100%) vote of approval.
  • Dividends & Financing – Your agreement can specify, the circumstances that lead to stakeholders being paid dividends or profits. You can also include broad terms that outline any rights stakeholders might as to further funding for the enterprise, before the enterprise seeks additional external funding.
  • Transfer of equity interests – This section will details the rights and processes that relate to the transference of interest amongst stakeholders and may include drag along and tag along provisions. It may also include provisions for what happens in the event that a stakeholders no longer wants to participate in the management of the enterprise. You can specify in detail an exit strategy including what happens in the event of a buy-out, sale of business and listing.
  • Deadlocks & Disputes – you can specify, in detail, what happens in the event of a deadlock or dispute (i.e. a decision that cannot be resolved).

For further information on other Agreements that may be relevant for you, see our page on Commercial Agreements or to establish a Shareholders Agreement contact Aitken Lawyers today on 02 8987 0000.